lansbury

For much of last year the mid rate was between $1.50 and $1.55. I waited until I got an exchange rate of $1.62. Was it the best I could have got, no. But it meant I got quite a few thousand extra dollars for my pension. Worth my time, and effort hell yes. But others mileage my vary,

Pulaski

But statistically you were somewhat lucky, because the USD-GBP rate has a history of occasional "hiccoughs", and a minor sterling crisis could easily have pushed the rate back down to 1.40ish.

When the USD-GBP rate is between 1.50 and 1.70 you are taking a roughly 50:50 bet that the rates will move in your favour, below that range and the odds are on your side, but above 1.70 and the risks of the USD-GBP rate moving adversely against your GBP balance, are much greater.

lansbury

So I play the percentages. Above $1.70 I bring our pensions over every month. Below $1.57 I wait. Above $1.62 I book forward contracts at regular intervals, I lose if the rate goes up and gain it back when it comes down. The aim is to get an average minimum exchange rate for my pensions of $1.60. The worst exchange rate I have got since we moved here in 2006 is $1.585. The advantage of controlling it myself, is my income is not so much subjected to swings as the rate moves, and I know, with forward contracts, what it will be for several months out. But what works for me may not for others.

MMcD

You describe the conversion rate for the deposit you received on 25 March as "pretty fair".
That's an understatement. I'd say it was phenomenal - if not downright impossible.

Because I was so intrigued - I looked up the pound -> dollar conversion rates for the entire month on XE (and mind you - their charts show the mid-market interbank rate....not one your ex-employer would be likely to secure, I don't believe ):

http://www.xe.com/currencycharts/?fr...to=USD&view=1M

If you slide the pointer bar back and forth horizontally - you'll see the rate fluctuation over the course of the month, including the week preceding the 25th March - at which time the rate was presumably locked in. How can he have gotten a rate which is higher than the mid-market rate ever was during the relevant period of time?

You probably don't know how he's managing to do that - but if it's indicative of what he's doing for you each month - you've got yourself one hell of a deal....and one heck of an ex-boss.

MMcD

I'm wondering how this scenario impacts reporting of this income to the IRS......
Would one then report it based on.....
1) Each pound sterling amount actually received and its (potential) dollar conversion rate at the time received (even though it's most likely not going to be converted that day and the posted Forex rate is not what you'll get even if it were) - or.....

2) The dollar amount received when each individual payment is ultimately converted to dollars, or...

3) An IRS average rate during the year in question, applied uniformly to all payments received over the course of the year (a total figure which may diverge wildly from what's been received after the individual conversions).

And is there any "investment expense" kind of deduction allowed by the IRS for any fees related to these exchanges?

Won't even inquire about "forward contracts"....sounds arcane and complicated - but I am curious as to the tax reporting implications.

PS: How did you manage to do exchanges above $1.70, which you say you sometimes do? Here's the XE chart going back 2 years from today:
http://www.xe.com/currencycharts/?fr...to=USD&view=2Y
The conversion rate was never that high during that time

lansbury

Pulaski mentioned the $1.70 rate, which hasn't been around for a few years. I was outlining how I handle the exchange for myself, if it goes over that. Mind you it is creeping up there at the moment.

For tax purposes I use 3 above. The average rate for the year taken from the IRS web site. For tax purposes the money is worth what it is on the date it is paid to me, and the IRS allows me to use the average rate for regular payments.

A forward contract is as straight forward as doing an immediate exchange. The exchange rate is locked at what it is on the day I take out the contract. I pay a deposit of 10% and have the contract executed at a future date paying the balance the day before the dollars are sent to my US account. It is useful because I know what I will be getting a few months in advance, so know what my income will be.

MidAtlantic

It is Citibank making the conversion not the former employer. My guess is that Citibank lump it in with all their GBP/USD business that day and therefore it is the multi-million rate. It could be a case where we can actually benefit from the big banks versus the money transfer specialists.

Pulaski

As I said above (#10), if you're looking at a single line chart, you are missing out on the intraday volatility. During anyone day the price of any traded currency, security or commodity goes up and down, and it is relatively rare that the daily closing price is the highest or lowest price for the day, so it is perfectly possible to trade during the day at a rate better than the closing rate. I do not know if that was possible in this case, but if you could find a candle chart of the GBP/USD rate that would tell you because as well as the daily close, it also shows the intraday low and high.

MMcD

It is! A clear example of *good* "mission creep" (the "mission" being our attempts to maximise the $ conversions )

I can't help but wonder whether this is a bit of a tax loophole (perfectly legal at the moment) which will soon draw attention from the IRS, now that they've begun focusing on overseas accounts and corroborative reporting by the institutions which hold them.

Oh, that doesn't sound as complicated as I'd imagined. But does this involve taking a contract on each payment individually or can they somehow be lumped together into one?
BTW: this isn't something my individual circumstances would ever allow for - but think it might be useful/helpful info to add to this thread...

Thanks for that clarification, MidAtlantic. However, I'd point out that I don't believe( ) this would be an example of "the ordinary course of business for the ordinary (you and I, for example) account holder. I believe "we" are usually charged by our banks for these conversions - and at quite a high rate. However, if audi4t's pension payments are in his ex-employer's UK bank account (rather than his own) - and that ex-employer is, say, the equivalent of a Fortune 500 Co. with massive pension fund holdings at Citibank, worth multi-millions - then the conversion rate they receive might very well be higher than those shown on XE's charts.
But again - I may be wrong....????

lansbury

Not sure it really is a loophole. I get a UK pension on the 6th of each month. That pension is worth in dollars the exchange rate on that day. The IRS don't know if I leave that money in the UK, and spend it there, or bring it across to my US bank. Or when I do either. If I was paid in the US tax would be deducted before payment on that day. Certainly hope that the IRS don't see it as a loophole to be closed, I have always been able to bring money over at a rate higher than the IRS average rate.



Yes one contract for each payment, is how I do it. When Wold First were allowing transfers to Oregon I arranged the contracts for amounts that I could transfer from Natwest online in one go. But I have done larger amounts and set up the payment to World First over two days. World First charged a 5% deposit, most other brokers charge 10%.

When we first moved over Moneycorp allowed you to have a contract for regular payments and lock the rate in for up to 2 years. They still do this. So when we first got here I had a 2 year contract at $1.95. The downside, at least then, was however Moneycorp did it, there were intermediary fees and wire transfer fees, which with monthly payments mounts up.

So the answer to you question is they can be individual contracts, or one contract for regular payments.

MMcD

The reason I see it as a "loophole" is that it allows one to report *less* income than has actually been received.
Why would the IRS open a door to that when they're hell-bent on grabbing any possible $ owed from any nook and cranny they can uncover?
I would guess that in providing this "average" yearly conversion rate - they do so in order to corral those taxpayers who are choosing to have their foreign income remain unconverted, in overseas accounts.
It's a means to obtain compliance from them.
I can't see any other reason for this provision.
Can you?

In effect however, by availing oneself of this rule - those who do convert to dollars and transfer their foreign income to the States - can easily benefit from (several 100 ?? dollars worth of) undeclared/untaxed income, when reporting.
And this leads to the next thing on my mind...
If this is perfectly legal ( and it certainly looks like it is, at least for now )......

(Why) Can one (not) do the following:
1) You are awarded your UK State Pension (I'm referring to the UK equivalent of US Social Security) in pounds (of course)
2) You no longer maintain a bank account in the UK and so....
3) You request the periodic payment be transferred by The Pension Service, in dollars, directly to your US bank account.
3) Following the above scenario - it seems that, when reporting to the IRS, you should be able to calculate the dollar value of the pound sterling pension income received by availing oneself of that same yearly average rate.

And yet - logic tells me - well, that's crazy...you can't do that.
But OTOH: Why not?
To which I reply (to myself) well.....because The Pension Service made the transfer for you, they did it straight away and that's that.
But, referring back to your quote (copied above).... isn't there some implicit unfairness here?
Should one, in effect, be "penalized" for having the funds converted/transfered to the States by them?
Why shouldn't you be allowed to use that same IRS yearly rate when calculating the yearly income total of the periodic payments?
Or maybe you are
What do you think?

PS...re: Red highlight in quote, above: That's not the case for me. No tax is deducted by The Pension Service when they send monthly payment to US bank accn't.

lansbury

I pay US tax on my UK income by quarterly estimated payments. This often means I am paying tax on money which is still in the UK waiting to be converted to dollars. How would I calculate the US value of that money if it hasn't yet been converted. Also I have a small annuity paid monthly, which I leave in my UK back and which gets used to buy birthday presents for UK family, or for spending money on trips back to the UK.

The difference between being paid my pensions in the UK, and being paid in the US as others do is the money received. If I received the money in my US bank in dollars that is the value of the money I received. The IRS wants the value of my pensions expressed in dollars so I have to convert from sterling, and give me a rate and instructions on how it should be done.

Interestingly I think the IRS uses a rate nearer to what you would get at a high street bank, rather than a currency broker, as their average seems to be about 4 - 5 below the averages show elsewhere. The IRS instructions say I must use a rate consistently, and I can average out regular payments. It allows me to pick any published rate I want to use, I choose to use theirs. Those people who have their pension paid directly into their US bank are choosing to use a different publish rate, that which prevails on the day of exchange. The only other way for me to do it would be to calculate the value of my UK pensions using the exchange rate on the day I received them. But as the rate fluctuates over the day I can still pick the lowest rate on that day.

As said before having the money paid in the UK gives more control over the exchange rate you get, but add to that the exchange rate for tax purposes.

MMcD

Could be wrong - but aren't "estimated taxes" beside the point?
With the exception of any payments received between 1 Jan. and whenever the current year's return is filed (15 April at the latest) - estimated payments don't represent tax on money "still in UK waiting to be converted to dollars" but rather, a guesstimate as to a future conversion value of income not yet received; the IRS conversion rate will remain unknown (unpublished) until sometime after the 4 estimated payments have already been made (15 Jan of the year following 1st 3 payments).
But the fact that many choose to leave taxable income in the UK, in pounds, is key to why I believe the IRS provide the option of using the IRS conversion rate (which is one of the points I was trying to express in my prior post).
Seems a way to force compliance.

And that's precisely what speaks to the perceived unfairness I question in my prior post:
The fact that those who no longer have UK bank accounts - necessitating (in the case of State Pension) the immediate conversion by the Pension Service of UK income to dollars so it can be directly deposited to a US bank account - puts such pension receivers at an unfair, monetary disadvantage when declaring that (same) income to the IRS:

Examples (using hypothetical Pension amount which is paid out at same times and dates to each Person):

Person A:
Paid £500 pounds every 4wks = £6,500 yr. = $9,774.05 declared total (IRS 2013 rate: £1.00=$1.5037)

Person B:
Paid £500 pounds every 4wks = £6,500 yr. = $10,131.78 declared total (Income if pension's converted by Pension Service/ transmitted to US bank account. Total is based on the 13 different, fluctuating exchange rates used by UK govt. for each of 13 payments made in 2013.

Conclusion...having just gone thru this excruciating exercise - I see the "perceived unfairness" - doesn't amount to all that much:
In this hypothetical case - if one were receiving £500 every 4 weeks - it amounts to having to add $358 more to ones AGI when reporting to the IRS.
OTOH - I guess that difference might (if you're unlucky) serve to actually push you into the next higher tax bracket - and it definitely results in a slight increase in tax owed. It might also impact those deductions which are dependent on exceeding certain AGI thresholds, before being allowable.
Hmmmmm.....now that I ponder the specific tax ramifications - yes - it matters, after all.

And finally - back to original point, using the above example:

Person A and Person B both received the same income payments on same dates
But Person A is given an unfair advantage because he's allowed to use the IRS rate - which, I don't think (?????) Person B is allowed to do.
However, pragmatically - Person A is going to receive the same higher income (as Person B) when he does choose to bring this income to the States - because he will (most likely) convert it himself at 1% less than the mid inter-bank rate (rather than the 4-5% which your quote below estimates the IRS rate to be) - and if he waits to convert may even improve his actual income.
Person B, receiving the same Pension, can't do that and must declare higher taxable income to IRS than Person A.

"Those people who have their pension paid directly into their US bank are choosing to use a different publish rate"

On the contrary - when they have no UK bank account, and are not allowed to have one, they are choosing nothing. They have no choice in the matter and the rate is determined by the Pension Service.
To be clear - the Pension Service (and everything else on the UK side is great, in my opinion). Complaint is with the IRS

lansbury

Estimated taxes are I believe valid because tax is owed on the money once received. If tax is under paid by $1000 or more a penalty is levied, as I know to my cost. Tax is due on the money regardless of where is was received, or kept, and must be included as worldwide income for the tax year on a return. Estimated tax must by paid, quarterly, and not left until money is transfer into dollars. If money is left in the UK and never converted to dollars US tax is still due on it.

It that case they are not receiving a pension paid in a foreign currency, but receiving a pension paid in dollars. The income is received in dollars and that I think is the difference to the IRS. I concede you have an argument it isn't fair.

If I pay US tax on my pension based on an average rate of $1.65, but leave my pension in the UK. Should I be able to claim a deduction if when I eventually move it to the US I only get $1.64?

To be fair there would be no yearly average rate. The rate would be that on the day the money is received. By what rate:-

1) The mid (spot) rate

2) The High Street bank publish over the counter rate

3) The rate from a currency broker. How is that determined without booking a transaction.

4) The IRS publishing a rate for every day of the year.

The IRS average yearly rate seems the easiest way.

MMcD

Oh absolutely! To the contrary, unless withholding has been taken before one receives payments - it's essential that Estimated Taxes be paid (both Federal *and* State - unless you reside in one of a handful of State exceptions). If not, a penalty will result....as I guess you found out (how dismaying for you )
I certainly never said they weren't "valid".
What I did say was: "Could be wrong - but aren't "estimated taxes" beside the point?"
..... by which I meant discussion of them, in the specific context of my expressed concern, seemed to obscure or by-pass my point.
Particularly since the IRS rate table isn't even published until after the final estimated payment for the current tax year has already been made - ie: the 4th estimated payment for 2014 tax year is due 15 Jan. 2015.
However, the IRS rate table for conversion of foreign income won't even be available till Jan. or Feb. 2015.

And I guess I'm saying - if we are awarded in pounds, on the same date, at the same time of day - an equal UK pension amount ... I too, as a matter of fairness, should be able to convert it's value for tax purposes, using the same IRS rate as someone who has instructed the Pension Service to transmit their pension to a UK bank. After which they may very well convert it straight away, at a rate several points higher than the IRS rate which they're allowed to subsequently use when doing their taxes. But because I no longer have a UK bank account - I'm put at a disadvantage by the IRS.

Anyway - just having a bit of a gripe and a moan....but in truth (tho it may be hard to believe.......I'm not complaining really....I consider myself lucky